Reports & Studies

This is an archival or historical document and may not reflect current policies or procedures.

Special Studies

Special Study #7:

The History and Development of the Social Security Retirement Earnings
Test

by Larry DeWitt,
SSA Historian

August 1999

In his 1999 State-of-the-Union address, President Clinton announced
his support for the idea of eliminating the Social Security Retirement
Earnings Test (RET). The RET is unpopular with beneficiaries who
want to have their retirement benefits and continue to work. Eliminating
the RET has long been a favorite proposal in Congress. With the
President's support, it is likely that the RET will soon undergo
historic change. This paper examines the role and development of
the RET; how it came to be part of the Social Security program,
why it was created and how it evolved over the years.

The Social
Security Act of 1935

The Social Security Act of 1935
contained two programs of economic security for the aged: Title
I of the Act provided non-contributory, means-tested, old-age
pensions, in the form
of state welfare programs with federal funding. Title II of the
Act, what is now thought of as Social Security, provided old-age
insurance through a contributory
social insurance scheme. The old-age insurance program required
retirement from gainful employment as a condition of benefit receipt.
For wage earners, this requirement was and is measured primarily
by a test of earnings levels, hence the RET. The RET is simply the
administrative form of the principle that one must be retired in
order to collect retirement benefits from Social Security's old-age
insurance program. The exact form of this requirement has changed
considerably over the years, as we shall see, but the general principle
has characterized the program from its inception.

The Retirement
Test

In 1991 the House Ways & Means
Subcommittee on Social Security held a hearing on the Social Security
retirement test. Many of the witnesses testified in favor of repealing
the RET, and several agreed with the observation of a senior Congressman
from Arizona who stated: "Social
Security, when it was created in 1935, sought to achieve two goals-moving
older workers out of the work force to make way for younger workers,
and to partially replace lost income due to retirement. Those goals
were applicable in 1935, but are not in 1991."(1)
Around the same time, a member of Congress from California authored
a column in the Los Angeles
Times in which he stated: "So
how did this regressive and unproductive test become policy? It
was born out of Depression-era reforms in 1935 to create jobs during
the most grim economic period in U.S. history. Millions of older
Americans were discouraged from staying employed. The earnings test
reduced their overall income, making it unproductive for them to
work beyond retirement age. This meant younger workers with families
could have jobs."(2)
A recent monograph for the Third Millennium group put it this way:
". . . the paramount
short-term factor in Social Security's birth-the Great Depression
. . . For the short term, it was considered imperative to get the
elderly out of the job market. . . Social Security still carries
out this Depression-fighting aim, despite the fact that there is
no longer any goal to be served by pushing seniors out of the workforce."
(3)

This idea about the origins of the
RET is very common and is often advanced in discussions about the
RET.(4) Essentially, it attributes the rationale for the RET to
a set of unique economic circumstances prevailing during the Great
Depression and to a supposed industrial policy of removing older
workers from the workforce during that period. The gist of the argument
is that since this set of economic circumstances no longer obtains,
and the industrial policy objective is no longer desirable, there
is no present rationale for the inclusion of the RET in the Social
Security program.

The problem of the "superannuated
worker" is a traditional one in industrial policy and pension
theory. Since the onset of the Industrial Age, older workers began
to find themselves at the end of their productive working lives,
often without means of support. Such older workers often tried to
remain employed and employers sometimes tried to find ways to move
them out of the workforce. So the idea that this industrial policy
objective underlies the RET, has an initial plausibility. But it
is, as we will see, largely a historical myth which has grown over
time and assumed the status of "common knowledge."

The retirement decision is a complex,
multi-variate phenomenon, involving considerations of health, lifestyle,
workplace circumstances and psychology, as well as economics. Whether
any single economic incentive, such as the RET, could have a major
impact on this decision is still an open question, with the available
evidence inconclusive.(5) In any case, that question is beyond the
scope of this paper. We are concerned only with whether the RET
could plausibly have provided such incentive effects in the context
of the mid-1930s, and whether or not such incentive effects were
part of the intentions and goals of the program's designers.

The Purpose
of the Retirement Test

Under social insurance theory, the
rationale for the RET is simple and straightforward: one must retire
in order to receive a retirement benefit because loss of earnings
due to retirement is the insured condition. The risk-sharing inherent
in insurance schemes rests on this principle. Under the alternative
interpretation, the purpose of the RET is to force a choice on the
aged worker: keep working and forgo the benefit or leave the workforce
in order to collect a Social Security retirement benefit. According
to the hypothesis, the RET was introduced into the Social Security
Act of 1935 because the designers of the program were motivated,
at least in significant part, by the industrial policy objective
of removing older workers from the workforce in order to make room
for unemployed younger workers.

This hypothesis is closely tied
to the economic and social circumstances of the Depression. We can
conceive of times when the demographics of the workplace are quite
different. What becomes of this idea when there is low unemployment,
high productivity, low numbers of older workers in the workforce
and a small pool of willing older workers outside the workforce
seeking to get back in? In other words, how would we view the RET
in a world where we had no need to either encourage or discourage
workforce participation by older workers? Presumably, there would
be no need either to have or not have a RET in such a world, from
the perspective of industrial policy. And yet, from the perspective
of social insurance theory, we might still argue that the principle
of the RET is applicable. We might still argue that both on grounds
of risk-sharing, and of philosophical principle, that we should
not pay insurance benefits to covered individuals who have not suffered
the requisite loss of income.

This points up an important distinction.
If superannuated workers remain in the workforce because they have
no alternative means of income security, then providing a retirement
pension fulfills an unmet social need. Certainly, much of the rhetoric
of the social insurance movement suggests this as a motive. Also,
the social insurance movement sought to prevent dependency in old
age, meaning to prevent the social catastrophe of older workers
leaving the workforce, for whatever reasons, without adequate means
of post-employment income security. This too was a major part of
social insurance theorizing and a major part of the rhetoric of
the creators of the Social Security program. Neither goal has anything
to do with industrial policy. On the other hand, if older workers
remain in the workforce because they do not want to retire, but
the offer of a retirement benefit induces them to do so, then this
is an expression of industrial policy. So the question is, which
of these visions of the world did the designers of the Social Security
program have in mind in 1934-35?

The Depression
and the Potential Impact of Social Security

The notion that the RET was put
in the Social Security Act of 1935 in order to move older workers
out of the workforce, rests on four premises:

In the early 1930s there were
large numbers of older workers in the workforce;

There were large numbers of
young unemployed workers who were being blocked from job opportunities
by the presence of older workers;

The provisions of the 1935
Social Security Act would serve as an effective incentive encouraging
older workers to leave the workforce;

This industrial policy objective
was a major reason for adopting the RET in 1935.

We can begin by observing that the
industrial policy interpretation of the RET is problematic in its
first three premises.

In the first place, the aged had
already been forced out of the workforce in disproportionate numbers
by the economics of the Depression. Since older workers are generally
the highest-paid workers in a business and often are thought to
be less productive than younger workers, in many industries they
were the first ones laid-off in the Depression. They were also the
least likely to be re-hired for the same reasons. As a consequence,
workforce participation for older workers was much lower than for
younger workers.

The available data on unemployment
during the early years of the Depression is severely limited. Before
the creation of the unemployment insurance program, which became
the institutional locus for the collection and dissemination of
such data, the main statistics were produced by the decennial U.S.
Census. The 1930 Census gathered data on unemployment, and produced
two volumes of reports on the problem.

In 1930, according to the Census
data, workers age 65 or older were barely 4.5 percent of the workforce
(see Table 1).

Table
1: Workforce Percentage by Age Cohort
(6)

Age Cohort

10-15

15-24

25-34

35-44

45-54

55-64

65-74

75+

Number

392,988

11,442,237

11,823,004

10,500,540

7,831,161

4,590,592

1,869,944

325,023

Percentage

0.8

23.4

24.2

21.5

16.1

9.4

3.8

0.7

The number of aged workers outside
the workforce seeking to get back in was also very small. Of the
3,187,647 workers in 1930 out of work and seeking employment, barely
133,815 were age 65 or older.(7)

So older workers were not a major
factor in blocking opportunities for younger workers or in competing
with them for the job openings which did occur. So while we can
perhaps conceive of circumstances in which large numbers of entrenched
older workers are blocking workforce entry to younger workers, this
was not in fact the situation in the 1930s, as far as the data available
to program planners in 1935 indicated.

An even simpler point can be made
about the ineffectiveness of the supposed incentives in the retirement
program. In 1932 the average wage was $100 per month while the average
Social Security benefit under the 1935 Act was expected to be $17.50
per month. Very few workers, who did not otherwise want or need
to retire, would have traded a job for this retirement benefit.
Moreover, benefits under the old-age insurance program were low
and would remain at very low levels for many years to come. It was
1951 before the average Social Security retirement benefit exceeded
the average old-age welfare pension benefit. So even if, in present
circumstances, Social Security retirement benefits offer strong
economic incentives encouraging retirement, this was not true in
the early years of the program.

Another problem comes from the simple
observation that the contributory old-age insurance system could
not have an immediate impact on any workers since benefits were
not scheduled to begin until 1942. The basic idea of the old-age
insurance system was that it would build old-age security gradually,
for future generations, so that they would not find themselves impoverished
in the same way that the already aged were. As historian Edward
Berkowitz said of the old-age insurance program: "It
was not about the current depression so much as the next one."(9)
It was the immediate relief provided by the Title I old-age pensions
which was designed to help those already old in 1935. So if any
provision of the 1935 Act could possibly have had an immediate impact
on workforce participation rates of the elderly it would have been
the non-contributory old-age pensions authorized in Title I of the
Act, not the Title II Social Security benefits.

Finally, it is well to recall that
the original Social Security program covered fewer than half the
workers in America and the RET only applied to earnings in covered
employment. Jobs in non-covered employment were therefore a ready
alternative to older workers who might have wished to work and receive
a Social Security retirement benefit. Non-covered earnings were
first counted in the RET starting in 1954 and up to that point still
about 40 percent of the available jobs were in non-covered employment.
It thus seems implausible to suppose that the program's designers
could have expected such a porous incentive to have much real labor
force impact.

Despite these obvious shortcomings
of the old-age insurance program as a mechanism for industrial policy,
it is possible that, as a matter of historical fact, the founders
of the program intended it to accomplish this objective. Perhaps
they believed that one laudatory effect of the RET would be to provide
an incentive for older workers to leave the labor force. Was this
their intention? To answer this question, we must carefully examine
the documentary record, including statements by the program's designers
and the various official documents involved. We will see that there
is some evidence which could be construed in support of this thesis,
but the overwhelming evidence suggests this industrial policy objective
had little or nothing to do with inclusion of the RET in the original
Social Security Act of 1935.

Social Insurance
in America

The modern approach to retirement
security emerged out of the social insurance movement which began
in Europe in the late 19th
century. It was the European social insurance systems which were
the starting point for the old-age insurance provisions of the Social
Security Act. The first modern contributory social insurance program
was designed by Germany's Iron Chancellor, Otto von Bismarck in
1881. By the time the U.S. was considering social insurance in 1934-35,
as many as 34 European nations had existing social insurance programs.
A key point to notice about these European systems is that they
were designed and implemented long before the Depression. So the
need to encourage older workers to retire to make room for unemployed
younger workers, a presumed problem of the Depression, was not behind
the design decisions made by the creators of these early systems.(10)

The European idea of social insurance
began to be felt in America by the turn of the century. Probably
the two most influential of the social insurance theorists were
Abraham Epstein and I. M. Rubinow. Two other prominent academic
experts in this area were J. Douglas Brown of Princeton University
and Barbara Armstrong of the University of California. (11)

In 1913, Rubinow published his classic
book on the subject, Social Insurance.
This book influenced a whole generation of social insurance theorists.
Rubinow's work was known to FDR who considered Rubinow to be the
"greatest single authority upon social
security in the United States." (12) According to Rubinow:

"All insurance is a substitution
of social, co-operative provision for individual provision. Technically,
this substitution of social effort for individual effort, is known
as the theory of distribution of losses and the subsequent elimination
of risk. . . the social advantages of distribution of loss are equally
applicable to all forms of insurance, to commercial insurance as
well as social insurance . . (13)

For the social insurance theorists,
all social insurance benefits operate on the
insurance principle,
which requires that one receives the promised benefit when one suffers
the insured condition. Social insurance insures against loss of
income due to what President Roosevelt would come to call the economic
"hazards and vicissitudes of life." So from the point
of view of social insurance theory, the RET is simply an expression
of the insurance principle in operation. There are very few explicit
statements regarding the RET itself in the documentary record; but
to the extent that Social Security's designers conceived of it as
operating under insurance principles, it makes it likely that RET
was put in the program to comport with these principles.

There were schemes in the Depression
which did have a public policy goal of removing older workers from
the workforce. The most prominent example was the Townsend Plan.
The Townsend Plan wanted the government to provide a pension of
$200 per month to every citizen age 60 and older, funded by a 2
percent national sales tax. Dr. Townsend's agenda definitely included
the idea of encouraging older workers to step aside to make room
for younger workers. The cover of the millions of copies of the
Townsend Plan distributed throughout America contained the Plan's
slogan: "Youth for Work-Age for Leisure."

The Townsend Plan was very influential
in the 1930s. In fact, the Townsend Plan was one of the motivating
factors inducing President Roosevelt to announce his own social
insurance plan. FDR is reported to have observed: "We
have to have it. . .The Congress can't stand the pressure of the
Townsend Plan unless we are studying social security, a solid plan
which will give some assurance to old people of systematic assistance
upon retirement."
(14) It is plausible to suspect that confusion between Social Security
and the Townsend Plan is the original source of the persistent idea
that Social Security had the objective of removing older workers
from the workforce. (15)

There was also a movement for company
pensions in the industrial sector in America starting at the turn
of the century. (16) Industrial pensions are an interesting case
because a familiar idea in early industrial policy was that the
provision of retirement pensions had the laudatory effect of encouraging
superannuated workers to retire, making room for the entry and promotion
of younger, presumably more productive, workers. The industrial
pension movement of the early 20th
century was "sold" to employers, in part, on the basis
of this idea. This "selling point" was needed because
industry had to have special incentives-beyond the provision for
unmet social needs-because to offer retirement pensions often put
them at competitive disadvantages in relation to their competitors
who did not bear this cost of doing business.

One clear contemporary example of
a public retirement system which had an objective of removing older
workers from the workforce was the Railroad Retirement System (RRS).
Originally enacted in 1934, the RRS contained a provision for mandatory
retirement at age 65, with possible one-year extensions to age 70
if both the worker and the employer agreed. The 1934 act was declared
unconstitutional and two weeks after signing the Social Security
Act into law President Roosevelt signed the new 1935 version of
the RRS into law. Under the 1935 version, retirement at age 65 was
not mandatory, but the worker's annuity was reduced 6 2/3 percent
for every year he delayed retiring after age 65. This was intentionally
done to encourage older workers to leave the workforce, making room
for younger workers. This was a special problem in the railroad
industry, where seniority rules put younger workers at insurmountable
disadvantages.

Clearly, when public policy makers
were intent on the objective of encouraging retirement of older
workers, such as in the RRS, they knew how to do so, and the programs
they designed contained explicit provision for this goal. That no
similar features are found in the Social Security Act of 1935 again
suggests that this was not one of the objectives of the program's
designers.

The Committee
on Economic Security

To design his social insurance proposal,
President Franklin D. Roosevelt appointed a five-member cabinet-level
Committee on Economic Security (CES), chaired by Secretary of Labor,
Frances Perkins.(17) To support the work of the CES, an Executive
Director was appointed (Edwin Witte of the University of Wisconsin)
and a Technical Committee was formed, consisting of experts on loan
from other Federal agencies and a handful of outside consultants.
The old-age insurance plan was drafted by three consultants on the
Technical Committee: Barbara Armstrong (a law and economics professor
from the University of California); J. Douglas Brown (an economist
from Princeton); Murray Latimer (chairman of the Railroad Retirement
Board); with the help of three staffers: Otto Richter, a senior
actuary; Marianne Sakmann, a research assistant; and Robert J. Myers,
a junior actuary. These individuals are the principal authorities
on the purposes of the provisions of the Administration's social
insurance proposals.

The CES generated a ten-volume set
of studies and reports, which was never published, along with a
final summary report to the President which was 74 printed pages.
The President transmitted to Congress the CES Report, a draft Economic
Security Bill, and a covering message. In 1937, two years after
passage of the Social Security Act, the Social Security Board published
a 592-page book (Social
Security in America),
summarizing the 10 volumes of unpublished material. So, these documents--the
unpublished 10-volumes of studies, the 74-page report, the draft
administration bill, the President's cover message to Congress and
the 1937 book--constitute the primary source documentation of the
intentions of the program's designers on the CES.

A key figure in this discussion
is of course President Roosevelt. The Social Security Act was his
legislative initiative and it was, according to Frances Perkins,
the proudest accomplishment of his administration. We must give
primary weight to FDR's conception of what Social Security was designed
to do. FDR was of course vitally concerned about the problems of
relief. He wanted to get the nation back to work and he deployed
many strategies to accomplish this, from the Civil Works Administration,
to the Works Progress Administration, to the Civilian Conservation
Corps. He was also concerned to provide immediate relief to the
needy elderly. But in everything he said he made a clear conceptual
distinction between the objectives of these various relief activities
and the objectives of his old-age insurance proposals.

Even before becoming President,
FDR was an advocate for social insurance. In 1931, in commenting
on New York state's old-age pension program which he had recently
signed into law, he made these observations:

". . . I am not satisfied
with the provisions of this law. . . Our American aged do not want
charity, but rather old age comforts to which they are rightfully
entitled by their own thrift and foresight in the form of insurance.
It is, therefore, my judgment that the next step to be taken should
be based on the theory of insurance by a system of contributions
commencing at an early age." (18)

In his message to Congress in June
1934, the President announced his intentions regarding Social Security:

"Next winter we may well
undertake the great task of furthering the security of the citizen
and his family through social insurance. . . I am looking for a
sound means which I can recommend to provide at once security against
several of the great disturbing factors in life--especially those
which relate to unemployment and old age. . . . I believe that the
funds necessary to provide this insurance should be raised by contribution
rather than by an increase in general taxation. Above all, I am
convinced that social insurance should be national in scope . .
. leaving to the Federal Government the responsibility of investing,
maintaining and safeguarding the funds constituting the necessary
insurance reserves."
(19)

In his transmittal letter to the
Congress in January 1935 FDR summarized the essence of the proposal
he was sending them:

"In the important field
of security for our old people, it seems necessary to adopt three
principles: First, non-contributory old-age pensions for those who
are now too old to build up their own insurance. It is, of course,
clear that for perhaps thirty years to come funds will have to be
provided by the States and the Federal Government to meet these
pensions. Second, compulsory contributory annuities which in time
will establish a self-supporting system for those now young and
for future generations." (20)

On the other hand, FDR did have
some notion about the Social Security proposal's potential effects
on the labor market. His strongest statement on the issues came
in the first of his famous "fireside chats":

"The program for social
security now pending before the Congress is a necessary part of
the future unemployment policy of the Government. . . . It proposes,
by means of old-age pensions, to help those who have reached the
age of retirement to give up their jobs and thus give to the younger
generation greater opportunities for work and to give to all a feeling
of security as they look toward old age. . . . Provisions for social
security, however, are protections for the future."
(21)

Notice, however, that in this quotation
the President refers to "old-age pensions" as having the
hoped-for workforce effects, not the old-age insurance program.
So he could not be referring, even obliquely, to the RET. It was
the understanding of the program's designers that the old-age insurance
program was intended to benefit not those already aged, but the
younger worker who would be in a better position in the future to
avoid the kind of impoverishment which the aged workers of the Depression-era
were experiencing. The President and the CES believed the non-contributory
Title I program (old-age assistance) was the only part of the Act
which was designed to have an immediate impact on aged workers.
As the Report of the CES summarized the intent of their proposal:

"An adequate old-age security
program involves a combination of non-contributory pensions and
contributory annuities. Only non-contributory pensions can serve
to meet the problem of millions of persons who are already superannuated
or shortly will be so and are without sufficient income for a decent
subsistence. A contributory annuity system, while of little or no
value to people now in these older age groups, will enable younger
workers, with the aid of their employers, to build up gradually
their rights to annuities in their old age."
(22) In the 1937 book version of the work of the CES, we find the
only explicit evidence for the industrial policy rationale for the
RET:

"Since retirement from
regular employment could be made a condition for receipt of benefits,
the displacement of superannuated workers from the labor market
would be accelerated. . .
If old-age insurance benefits are paid to persons continuing in
regular employment after attainment of age 65, they will become,
in effect, a subsidy to older workers in competing in the labor
market. Since the employment and wage rates of younger workers would
be adversely affected by such subsidized competition, it was felt
that old-age insurance benefits should be suspended in those cases
where otherwise qualified persons were regularly employed.It was believed that the
social advantages of encouraging retirement at age 65 far outweighed
the objection that individual equities would be reduced when benefits
were thus suspended. . . . In
any event, the main purpose of the plan is to provide a partial
compensation for the loss of earned income." (23) (Emphasis added.)

It will be useful to unpack this
language a bit. The passage asserts three propositions:

The RET will encourage older
workers to leave the work force;

The absence of the RET would
encourage older workers to stay in the work force;

The primary purpose of the RET is the social insurance
principle of replacement of lost income.

We have already shown that proposition
1) is false, and we are discussing proposition 3) at some length.
Let us consider, in passing, proposition 2).

As far as economic incentives are
concerned, it is a more plausible argument to claim that paying
retirement benefits to older workers, even if they continue working,
would create a subsidy, enabling them to stay in the workforce.
This is especially true when we consider that a common practice
during the Depression-era was for employers to try and maintain
jobs for their workers by reducing their pay or by splitting one
job between two or more workers. In such an environment, a subsidy
paid to older workers would make it that much easier for them to
stay in the workforce. But to observe that the absence of a RET
would have likely labor market effects in one direction, is not
the same as concluding that its presence would have labor market
effects in the other direction. A small subsidy to a wage earner
could have incentive effects in encouraging continued employment
whereas that same small amount might not induce someone to quit
working and rely on it for their primary source of income. (24)

It is important to note that the
1937 book was not a strict summary of the unpublished CES studies,
but was a partial summary, an updating, and a rationalization of
the Social Security program in the light of the legislative changes
introduced during Congressional consideration of the original CES
proposals. None of the language quoted above is in the original
CES Report or anywhere in the 10 volumes of unpublished studies.
It appears for the first time two years after passage of the Act.

Following the introduction of the
Administration's bill in Congress, the staff of the CES was tasked
with developing additional papers in support of the proposals. One
such paper, authored by Murray Latimer and included in the unpublished
studies sometime in early 1935, explicitly made the argument that
the old-age insurance program in general would have the suggested
industrial policy effects:

"It has been said that
the several titles of the Economic Security Act have no relation
one to the other. . . . I wish specifically to call attention .
. . to the connection between old-age insurance provisions and the
unemployment compensation provisions. The population of this country
is rapidly growing older. Unemployment among the aged group has
been increasing for many years. . . . But many aged persons have
remained in employment. By so doing they have pushed out of employment
many younger employees. . . An old-age insurance program will solve
this permanent problem of unemployment among our aged people. It
will act as an incentive for many of them to leave their employment
because they are assured of a livelihood in their old age without
work, and because of this unemployment among younger workers is
bound to decrease. . . . From that point of view, unemployment compensation
and old-age insurance deal with two aspects of the same fundamental
problem. Either one without the other would seriously impair the
chances for achieving economic security."
(25)

This was the first indication in
any of the CES' work that, at least the staff, someone viewed this
as one rationale for the retirement program. Notice however that
Latimer is not attributing this rationale to the RET itself. He
is suggesting that the provision for this unmet social need (income
security in retirement) will have the laudatory additional benefit
of improving the unemployment problem over the long-term.

In her 1932 book on social insurance,
Barbara Armstrong devoted more than 60 pages to a discussion of
the problem of old-age security, all in terms of provision for the
unmet social need that old-age presented, without once mentioning
any industrial policy objective of removing superannuated workers
from the workforce. In her first paper on old-age insurance for
the CES, written in August 1934 (and among the unpublished studies)
under the title "Invalidity and Old Age Insurance" Armstrong
wrote: "Risks insured
against: . . . Loss of earning capacity through old
age, old age being defined
as the age of 65 years or over." (26) (Emphasis in original.). However, more
than 30 years later, in an oral history interview, she made the
most extensive claims for the industrial policy thesis of any of
the principal players from 1934-35:

Q: "What about the question
of a retirement test as one of the provisions of the bill?"

Armstrong: ". . .There
were two objectives when they set up Social Security provision for
old age. . . The first objective was to protect the person who had
to retire and who therefore was going to be without current earnings
income and to give him a substitute for the income he had lost because
he had become superannuated. . . . Now, in addition . . . you had
the problem of the unemployed, a tremendous unemployment, which,
you know, was coincident with the Great Depression. And they did
not want old people in the labor market. . . . Therefore, the objective
was not only to
protect the older worker from
no earnings income, but it was also to get him
out of the labor market. .
. .but it had to be on retirement. And retirement means you've stopped work
for pay. . . If you haven't retired you are not without income from
work, ergo, you are not eligible for retirement benefits. . . This
is social insurance. It's not commercial
insurance. . . ."
(Emphasis in original.) (27)

The Armstrong oral history provides
some of the best evidence for the industrial policy thesis. Even
so, there is much ambiguity in Armstrong's remarks. This discussion,
which ranges over 10 typed pages in the transcript, begins with
a question about the RET, but not all the remarks which follow are
directed to the RET. Armstrong moves among half a dozen topics during
these 10 pages and the link between the RET and the industrial policy
is never made explicit. On the other hand, Armstrong's view of the
insurance principle as a foundational principle in Social Security
retirement benefits is very clear and unambiguous.

J. Douglas Brown became one of the
leading theorists of Social Security in the years following the
creation of the program. In 1972 he published his opus on the subject,
entitled An American Philosophy of Social Security.
Brown made a clear explanation of his views on the RET, without
any mention whatever of the industrial policy thesis:

"While the established
age for normal retirement is a fundamental issue in social security
policy, it has not received the attention in recent years which
another issue, the earnings-test, has gained. The contingency to
be covered by old age insurance is not age alone but insufficient
earnings from current employment because of old age. Old age insurance
is indemnity insurance. It is the non-existence of any earnings
from employment, or of sufficient earnings for reasonable support,
which is indemnified. This aspect of the contingency to be compensated
has been the focus of more misunderstanding since the Social Security
Act was passed than any other feature of old age insurance."
(28)

From his part, Robert Myers has
unambiguously stated his view of the RET. In a 1996 oral history
interview, Myers was specifically asked about the industrial policy
rationale for the RET:

Q: I'm very interested in this
issue of the retirement test because there's a very common, what
I consider to be a myth, about the retirement test and I want to
check if I'm right. It's now said by some people that the retirement
test was put in the law in order to discourage older workers, to
get them out of the labor force so that younger workers could take
their place, and that was the intent of the retirement test. . .
Is that an accurate description of what happened and how the retirement
test came to be in the law or is that a myth that's evolved?

Myers: That's a myth that I've
frequently pointed out. That was a by-product, perhaps, that people
would retire, but my demonstration of why it's a myth is that the
average benefit was going to be maybe $15 a month and the average
wage was around $100 a month, so people weren't going to rush out,
leave $100 jobs to get $15 benefits. And that wasn't going to remove
very many people from the labor market. (29)

It would seem indisputable that
for the CES the central purpose of the RET was that given in social
insurance philosophy-that the insured individual was paid a benefit
only when he/she suffered the insured condition. While there is
some evidence that industrial policy objectives were viewed by some
CES staffers as an important concern, it is not clear that this
concern was linked to the RET, rather than to some other features
of the overall program. Brown and Myers specifically deny such a
link. Latimer was much concerned about the industrial policy objective,
but he does not link it to the RET. Armstrong offers ambiguous statements
on the matter. The only clear linkage appears in a brief statement
from the 1937 book, which itself may be a bit of historical revisionism.

Congressional
Consideration

The Economic Security Bill President
Roosevelt transmitted to Congress in January 1935 contained the
following language: "No
person shall receive such old-age annuity unless . . . He is not
employed by another in a gainful occupation." (30) This is the only language in the bill
relating to the issue of retirement. There is no language of any
kind related to any labor market effects of this or any other provision
of the social insurance program.

The final version of the Social
Security Act of 1935 contains this language on the subject:

"Whenever the Board finds
that any qualified individual has received wages with respect to
regular employment after he attained the age of sixty-five, the
old-age benefit payable to such individual shall be reduced, for
each calendar month in any part of which such regular employment
occurred, by an amount equal to one month's benefit."
(31)

The course of the RET provision
through the Congress has been recounted by Edwin Witte:

"All actuarial calculations
were made on the assumption that annuities would be paid only to
employees retiring from active employment, and this was provided
in the original economic security bill. The only person to object
to this provision was Mr. Beaman. He raised the point that 'active
employment' needed to be defined and rejected every attempted definition.
. . .It apparently was not realized by anyone that this change would
operate to again create a large deficit in the old age insurance
fund; in fact, there was no discussion of the financial aspects
whatsoever. When the subcommittee made its report to the full committee,
its recommendation to eliminate the provision relating to retirement
was adopted with discussion. As a result, no provision to this effect
was included in the House bill.

. . . the Senate committee gave
some attention to the requirement of retirement which was stricken
from the original bill by the House Committee. . . . there was no
difference of opinion among the members of the committee. In a public
statement given out after passage of the House bill, the President
included an item to the effect that retirement, of course, should
be a condition of granting of any annuity. This seemed to be taken
for granted by all members of the Senate committee . . . This amendment
was adopted without any dissent. Later on it was quite readily agreed
upon by the House conferees, who explained that the House committee
had never understood that the amendment eliminating the requirement
of retirement completely upset the actuarial calculations." (32)

This account by Witte is highly
significant. It was a contemporaneous memorandum prepared by Witte,
who was personally present in most of the executive sessions of
the committees during the bill's consideration and was better positioned
than anyone to assess Congressional intent. Witte makes clear that,
in the relevant committees of jurisdiction, the only non-social
insurance principles involved were cost considerations.

The House and Senate each held 3-4
weeks of hearings on the administration's bill during January and
February 1935. The lead administration witnesses were Edwin Witte,
Frances Perkins and, in the House, Harry Hopkins. Each of them discussed
the provisions of the administration proposals, including passing
mention of the RET, only in terms of standard social insurance theory.
No mention was made of any supposed rationale involving labor market
effects. Two staff members from the CES old-age security group also
testified.

In his testimony before the House
Committee, J. Douglas Brown makes the first mention of the objective
of removing superannuated workers from the workforce. But not in
the context of the RET, but rather by way of justifying the recommendation
that the government pay part of the cost of the retirement benefits
so that the pension amounts will be higher. It is the higher pension
amounts, according to Brown, which will have the labor market effects.
(Ultimately, this recommendation for a government contribution to
the retirement benefit was not adopted by the Congress.)

In his testimony, Murray Latimer
focused on the labor market issues in the legislation. Latimer,
like Brown, only mentioned the objective of removing older workers
from the workforce in the context of arguing for higher benefit
levels.

A distinction may be helpful here.
If one argues that the mere existence of a retirement benefit is
the incentive encouraging older workers to retire, then this undermines
the idea that it was the requirement
of retirement in the form of the RET,
that was the mechanism for accomplishing this goal. If mere social
provision were an effective incentive, then the existence of the
RET would be inexplicable under the industrial policy thesis. But
under the social insurance thesis, there would still be a role for
the RET since it would still be necessary to honor the insurance
principle of indemnity against loss. Thus, program designers such
as Latimer, Brown and Armstrong could all believe that retirement
benefits would in time encourage older workers to leave the labor
force and still believe there was a need for a RET to honor basic
social insurance precepts. I suggest this was in fact their view
of the matter. Failing to make this distinction, could lead someone
to leap to the false conclusion that since these program designers
had the industrial policy objective, and included a RET in the program,
they must have do so in order to achieve the industrial policy objective.
It is important to note this distinction because virtually all the
rhetoric about the industrial policy objective was in fact commentary
not about the RET but about the social provision of retirement benefits
in general. This is a distinction not always made by commentators
on this issue.(33)

To appreciate the significance of
this distinction we have only to observe that many political figures
would support the following argument: The
RET creates an incentive for older workers to leave the workforce.
This incentive is undesirable, therefore we should eliminate the
RET. However, few people
would support the following argument: Social
Security retirement benefits create an incentive for older workers
to leave the workforce. This incentive is undesirable, therefore
we should eliminate the Social Security retirement program.
(34) Clearly, the two factors are not interchangeable when considering
the industrial policy thesis.

In his testimony before the Senate
Finance Committee, Witte was asked to discuss the question of unemployment
among workers age 65 and older. He had an extended colloquy on the
subject, without ever mentioning the RET or any connection between
this issue and the old-age insurance program. In her testimony,
Secretary Perkins had a similar extended discussion with the Committee
about the matter of the unemployed, but in this discussion nothing
was said about the old-age insurance program. Both Witte and Perkins
viewed the replacement of lost income under the unemployment insurance
program as the vehicle in the bill for addressing the problem of
unemployment.

In his testimony before the Senate,
J. Douglas Brown also discussed the industrial policy objective
of removing older workers from the workforce. However, he did so,
not in the context of the RET, but in the context of social provision
and the unmet need of an older worker with insufficient income to
retire. (35)

In his testimony before the Senate
Committee, Murray Latimer expounded at length about his far-reaching
concerns regarding industrial policy and how they related to the
old-age insurance program and the problems of unemployment. Latimer
argued that social provision for retirement had the ancillary benefit
of suggesting to young workers that older workers would be retiring
rather than continuing in the labor force. He saw this as a "selling
point" to help reconcile younger workers to the imposition
of this new form of taxation. This "selling point" was
the same one Latimer had been making for years when arguing for
private sector industrial pensions.

At least one important member of
Congress made passing reference to the industrial policy effects
of the Social Security Act. Senator Robert Wagner (D-NY), principal
sponsor of the bill in the Senate, offered a long explanation of
the old-age insurance program, in straight social insurance terms,
and ended with this observation: "And
it must not be overlooked that industry will receive its full measure
of benefit. The incentive to the retirement of superannuated workers
will improve efficiency standards, will make new places for the
strong and eager, and will increase the productivity of the young
by removing from their shoulders the uneven burden of caring for
the old." (36)

While it is significant that an
important figure like Wagner gave some expression to the industrial
policy thesis, it is important to notice that he also does not tie
this concern to the RET, but rather attributes it in a general way
to the provision of retirement benefits.

There was virtually no other discussion
by other members of Congress, in either the extensive Committee
hearings or the floor debates, of the industrial policy thesis.
The Final Report on the bill in the House contained no provision
for a RET and so there is no discussion of any rationale. The Senate
Finance Committee Report did contain the provision and an explicit
statement of rationale:

"A further important change
in the parts of this bill dealing with old-age security which we
recommend is the amendment to section 202 to the effect that old-age
benefits shall be paid only to employees over 65 years of age who
are no longer regularly employed. This was provided in the original
bill but as the measure comes to the Senate it permits payment of
old-age benefits to workers who have reached age 65 but who still
continue in regular employment. This is an anomaly which we believe
should not be permitted. There is no need for payment of old-age
benefits to employees who continue in employment. This feature of
the House bill materially increases the costs and would have necessitated
additional taxes in future years. The amendment we suggest to section
202 will prevent anyone from drawing an old-age benefit while regularly
employed. This will reduce the costs under title II by many millions
of dollars in the course of the decades."
(37)

In the Finance Committee's view,
the RET is justified by appeal to costs and by appeal to social
insurance precepts ("there is no need for payment of old-age
benefits to employees who continue in employment"). But not
because of any industrial policy related to removing older workers
from the workforce.

So, as far as discerning legislative
intent is concerned, the available evidence is that Congress enacted
the RET due to considerations of social insurance principles, and
perhaps costs, rather than to industrial policy.

The old-age social insurance program,
with its RET, was enacted into law in August, 1935. Even before
the first monthly benefit was paid, the RET provision was amended
and it has been the subject of repeated amendments over the years.

The 1939 Amendments

The RET in the 1935 law, read literally,
prohibited any Social Security payment when even a penny was earned
in "regular employment." "Regular employment"
was not explicitly defined. Even before many provisions of the 1935
Act went into effect, major changes were enacted into law in 1939.
Wilbur Cohen, who was Edwin Witte's executive assistant on the CES
and the first professional employee of the Social Security Board,
has given us an eyewitness account of how and why this occurred:

"It was accepted both by
the Committee on Economic Security in 1934 and by the Congress in
1935 that retirement from gainful work should be a prerequisite
to the receipt of benefits. However, it is significant that neither
the proposal drafted by the Committee on Economic Security nor the
legislation enacted by Congress in 1935 gave any precise content
to the conception of "retirement." In part this was owing
to the lack of available statistical and economic information but
more to the fact that a precise definition of the term was not immediately
necessary, since such benefits did not become payable under the
original act until January, 1942. The matter was thus left for regulations
under the original law.

But the Social Security Board
concluded that it would be unwise to allow such a vital matter to
be left to the administrative discretion of the board through the
issuance of regulations. The Board, therefore, recommended in 1939,
and the Congress adopted, a proposal which had the effect of defining
retirement as the receipt of less than $15 of earnings in a month
from jobs covered under the insurance program. The Board felt that
it was not administratively advisable to apply the test to earnings
outside the coverage of the insurance system, since no adequate
records would be available." (38)

It is significant that the $15 figure
represented earnings at about one-third of the minimum wage mandated under the Fair Labor Standards Act of 1938, so
it was a measure which necessitated substantial retirement. (The
current retirement test exempt amounts, $800 per month for those
under age 65 and $1,292 per month for those age 65-69, constitute
90 percent and 145 percent of the current minimum wage, respectively.)
Placing a dollar figure on the RET was done primarily for practical
administrative reasons, to clarify with some precision what was
meant by "regular employment." This change did not signal
any change in the fundamental social insurance principle underlying
the RET.

The 1950 Amendments

With the coming of World War II,
prices and wages increased dramatically over pre-war levels. However,
throughout the War years, the RET had little effect since many older
workers remained employed or returned to the workforce rather than
retiring, in support of the war mobilization. Following the war,
the nation's retirement and pension policies came under new scrutiny
and the RET came under increasing criticism. There were obvious
problems with the existing test:

wages levels had risen since
1939 and the $15 figure was outdated;

the "all-or-none" nature
of the test was viewed as excessively harsh, it was thought that
a more gradual reduction could facilitate the transition from
full-time work, to part-time work, to full retirement;

some workers, especially among
the self-employed, never retired and hence would never be in a
position to collect a benefit for their contributions;

the RET was generally unpopular
with those who wanted Social Security to be more like an annuity,
payable simply by virtue of attaining retirement age.

In 1945 the House Ways and Means
Committee appointed a panel of staff-level advisers to study, among
other things, the RET. Their report, known informally as the Calhoun
Report, concluded that elimination of the RET would "profoundly
affect both the fiscal and conceptual aspects of the Old Age and
Survivors Insurance." (39)
Nevertheless, the study group recommended a number of liberalizations
of the RET, including raising the exempt amount, applying an annual
earnings test, modifying the "all-or-none" nature of the
test and eliminating the test entirely for workers age 70 or older.

In 1947, the Senate Finance Committee
appointed an Advisory Council which conducted a large and comprehensive
study of the Social Security program. The 1947-1948 Advisory Council
considered the RET in some detail. The Council's assessment was:

"In the opinion of the
Advisory Council . . . the work clause should not be designed to
encourage persons to cease all gainful work. The chief purpose should
be to prevent the payment of benefits to persons who continue working
for wages at or near the level of those earned during much of their
working lives; such persons have not suffered the loss of earnings
against which the system insures. . .

Many old-age insurance beneficiaries
undoubtedly consider any work clause a hardship and restriction
on their freedom of activity. In our opinion, the savings effected
by a work clause for beneficiaries who are 70 years old or more
would not be significant enough to outweigh the advantage of giving
some recognition to the beneficiary's desire to receive benefits
without qualification. . .

The social-insurance system
of the future will probably have to take into account, more than
does the present one, both the need for the economic contribution
of the aged and their desire to make that contribution."
(40)

This was clearly a philosophical
break with the principles of social insurance as they had been understood
up to that time. The Council was advocating making the Social Security
retirement benefit an annuity for those age 70 and older. Even so,
the rhetoric at the time did not describe this as an abandonment
of the social insurance principle of compensation for actual loss.
Other rationale about fairness and the popularity of the idea were
the reasons offered for removing the RET at a certain age. The Council
was suggesting what was, in effect, a political compromise to satisfy
those who wanted to work and receive Social Security.

Another important policy innovation
was introduced at the same time. The Council argued that so long
as the worker did not have "wages at or near the level of those
earned during much of their working lives," this was enough
to satisfy the principle of the RET. This was the beginning of the
practice of reducing the bite of the RET by increasing the exempt
amounts. But if we accept the Council's interpretation of the insurance
principle, then all the liberalizations in the exempt amounts over
the years can be construed as fully consistent with social insurance
principles. The elimination of the test at certain ages, however,
cannot easily be so construed.

Notice also that the "industrial
policy" argument has now been reshaped. It is now couched in
terms of encouraging older workers to stay in the workforce because
their economic contributions are desired. It is no longer a question
about whether there are older workers in the labor force blocking
the opportunities of younger workers. This is the real beginning
of the contemporary view that our industrial policy should be to
encourage workforce participation by older workers. This is the
historical tipping point where the concern now becomes more with
the absence of the RET than with its application. So even if we
grant that the RET has labor market effects, this was an idea which
really arose for the first time following World War II. It was not
a widespread idea in 1935.

The Report of the 1947-1948 Advisory
Council was received by the Social Security Administration (SSA)
and was analyzed extensively and was the basis for SSA's legislative
recommendations to the President. When President Truman sent his
legislative proposals to Congress, however, he only included an
increase in the RET exempt amount. He did not propose elimination
of the RET at age 70 as the Council had recommended. Truman was
motivated by cost considerations. The President had also recommended
creation of a disability benefit and the provision of early retirement
benefits for women. In view of these very expensive proposals, the
cost of eliminating the RET could not be accommodated in the President's
package.

The House Ways and Means Committee
decided to drop the President's proposals for early retirement and
disability benefits. With the money thus saved, it opted to eliminate
the RET for workers age 75 and older. The Senate adopted the House
position in conference.

In the 1950 amendments Congress
agreed to eliminate the RET starting at age 75 and to increase the
threshold from $15 to $50, but to retain the all-or-nothing nature
of the test. Because the self-employed were covered for the first
time under the 1950 amendments, an annual RET was introduced for
non-wage workers. The elimination of the RET for those age 75 and
older was rationalized as making the program more equitable for
the newly-covered self-employed, who, it was argued, tend to not
retire and hence they would be unable to benefit from their contributions.

The 1950 amendments were largely
about changes intended to enhance the adequacy of the program. For
example, the first ever cost-of-living increases were paid and the
benefit formula was raised so that future benefits would start from
this higher base. Coverage was also extended, setting the program
on the road to virtual universal coverage.

In this context, the abandonment
of a purist notion of the RET was driven by concerns over equity
issues; by the common intuition that it seems somehow "unfair"
for someone to contribute to a retirement system, and if they do
not retire, to forever fail to realize any return on their contributions.
This is of course the insurance principle in operation, but it has
always been difficult to appreciate this principle when applied
to retirement.

So by 1950, the nature of the Social
Security retirement program had finally been altered on the issue
of the RET. From that point on, it was established policy that the
RET need not always apply. The "pure" version of social
insurance had given way to the practical politics of public policy
making.

The 1952 and
1954 Amendments

Following the outbreak of the Korean
War, wages and prices again soared. The administration and the Congress
realized that an adjustment in the RET earnings level was in order.
In the 1952 Act the exempt amounts were raised (to $75 for monthly
wages and $900 a year for the self-employed), but no other significant
changes were made.

Shortly after taking office, President
Eisenhower announced a comprehensive review of Social Security,
including the RET. Despite wide-spread criticism of the RET, the
President did not propose its elimination, but did recommend further
liberalizations. In a January 1954 message to Congress, President
Eisenhower suggested the monthly test should be replaced by an annual
test under which the first $1,000 of earnings had no impact and
earnings above $1,000 would result in a monthly benefit being suspended
only for each additional $80 in earnings. In providing his rationale
for these changes, the President made a sweeping criticism of the
RET, in terms that have resonance with contemporary criticisms:

". . . present law imposes
an undue restraint on enterprise and initiative. Retired persons
should be encouraged to continue their contributions to the productive
needs of the nation. I am convinced that the great majority of our
able-bodied older citizens are happier and better off when they
continue in some productive work after reaching retirement age.
Moreover, the Nation's economy will derive large benefits from the
wisdom and experience of older citizens who remain employed in jobs
commensurate with their strength." (41)

As a result of these many criticisms,
the 1954 amendments again made significant changes in the RET. Wages
were put on an annual test, like self-employment income. This was
a considerable liberalization because it meant one could earn over
the monthly exempt amount for several months each year without any
loss of benefits provided the total earnings stayed under the annual
exempt amount. However, the test was still "all or none,"
with the full benefit withheld when the limits were exceeded. The
exempt amount was raised again, to $1,200 annually. Non-covered
earnings were counted for the first time. The age at which the RET
no longer applied was reduced from 75 to 72. The argument again
was one of equity; that lowering the RET cap would make the program
fairer to self-employed farmers, who were being covered for the
first time.

The 1960 Amendments

The 1960 Amendments brought another
key change in the operation of the RET. For the first time, earnings
over the exempt amount did not always produce a total loss of benefits.
For earnings between $1,200 and $1,500 the reduction was $1 for
every $2 of earnings. For earnings over $1,500 the old rule applied.
This was done to alleviate the perverse result of earnings above
the exempt amount sometimes yielding a net decrease in income, compared
with simply earning up to the exempt amount. This was one of the
inequities so criticized in the 1950s. From this point forward,
the RET would utilize this principle.

Interestingly, neither the House
nor the Senate version of the bill contained this provision as reported
by the Committees of jurisdiction. The House bill had no provision
regarding the RET and the Senate bill only contemplated an increase
in the annual exempt amount from $1,200 to $1,800. During the House
debate Ways and Means Chairman Wilbur Mills explicitly stated that
no changes were suggested in the RET due to cost constraints. And
since the bill was before the House on a "closed rule"
no amendments were offered regarding the RET, even though several
members spoke in favor of raising the exempt amount. The Senate
passed the bill with the Committee provision unamended. During the
Conference on the bill, the House receded to the Senate position
on the exempt amount and added the provision for the $1 for $2 offset.

The 1972 Amendments

The 1972 amendments introduced another
important innovation-the Delayed Retirement Credit (DRC). This credit
increases the benefit amount for those workers who delay retirement
past the Normal Retirement Age (NRA). The credit was initially set
at 1 percent per year. This amount was raised to 3 percent in 1977.
The 1983 amendments raised this credit to an eventual level of 8
percent (by 2009). For any month in which a benefit is paid, a DRC
cannot be claimed. The cost of paying additional benefits to persons
who continue working (if the RET were eliminated) would thus be
offset by the loss of DRCs for such persons. From a cost perspective,
the RET could be eliminated at the NRA in 2009 without any long-term
programmatic cost.

According to Myers (42), DRCs were
added to the law as a partial offset to the RET. The argument was
one of fairness. It was argued that if program participants continue
to work after 65, and forgo benefits due to the RET, it is only
fair that they receive some additional compensation for their extra
work.

This argument makes little sense
in the social insurance view of the RET, since to withhold benefits
in the absence of actual income loss is simply the insurance principle
at work. Although DRCs can be seen as having an industrial policy
objective (encouraging continued work) they do not fit neatly with
the industrial policy thesis of the RET either since they imply
that we have adopted two industrial policies with competing objectives
(the RET encouraging retirement and the DRCs encouraging continued
work). In the context of the RET, DRCs seem to make sense primarily
in political or budgetary terms rather than in terms of underlying
program rationale.

Also as part of the 1972 law, the
$1 for $1 reduction was replaced entirely by a $1 for $2 reduction
for all earnings above the exempt amount. This meant that no beneficiary
would suffer a net loss of income due to additional earnings. (Because
earnings were taxable and benefits were not, substituting a dollar
of earnings for a dollar of benefits could result in a net decrease
in income.)

The 1972 act introduced one other
very important innovation. Previously, the RET exempt amounts were
only raised when a specific act of Congress mandated an increase.
The 1972 law put the increases "on automatic" by tying
them to increases in average earnings, starting in 1975.

The 1977 Amendments

The 1977 amendments brought considerable
legislative activity surrounding the RET. The House passed a bill
eliminating the RET at age 65. The Senate passed a similar bill
setting the end age at 70. The Conference accepted the Senate position
and the final legislation ended the RET at age 70, effective in
1982. (An amendment in 1981 later pushed the effective date back
to 1983 due to short-term cost concerns.)

The 1977 law also separated the
cohort aged 62-64 from the 65-69 cohort, creating a more generous
RET for the second group. This was accomplished by a series of ad-hoc
increases for the older group, starting in 1978, after which the
automatic increases would again apply-locking in place the advantage
for the older cohort. This more advantageous treatment of those
past Normal Retirement Age (NRA) continues to be a prominent feature
of the RET.

A final change in 1977 eliminated
the monthly earnings test for all years after the year of retirement.
This "de-liberalization" was done to prevent the seemingly
unfair result of workers with large annual incomes receiving full
benefits for months in which they did not work, whereas workers
with much smaller incomes could fail to receive any benefits at
all if their income happened to be spread over the entire year.
Both the Ford and Carter administrations had recommended this change
and it was supported by the 1975 Advisory Council as well. This
is one of the few changes made in the RET over the years that had
the effect of making the test less generous.

Changes in
the 1980s

The 1980 Amendments partly reversed
course on the monthly test question. Eliminating the monthly test
for years after the initial year could result in anomalies for certain
self-employed individuals and for auxiliary beneficiaries when their
benefits terminated. For example, if a student received benefits
while in school but graduated and went to work half-way through
the year, his annual earnings might make him overpaid for the months
in which he legitimately received student benefits.

As a result, the monthly test was
restored for certain auxiliary beneficiaries in the year of benefit
termination as well as the year of initial entitlement, and earnings
from self-employment derived from work performed prior to retirement,
was not counted for purposes of the RET, except in the year of initial
entitlement.

The 1983 Amendments increased the
offset from $1 for every $2 of excess earnings to $1 for every $3-but
only for the NRA cohort. Even though this change was legislated
in 1983, its effective date was 1990. This was because the thrust
of the 1983 Amendments was to address short-range solvency problems
and Congress did not want provisions such as this one, which had
a programmatic cost, from taking effect during the 1980s while solvency
was being restored.

Legislation in 1988 made two minor
changes regarding the RET in death cases. Previously, in a death
case the exempt amount was prorated for the months in which the
beneficiary was alive. The new rule granted the full annual exempt
amount. Also, the higher exempt amount for the NRA cohort was granted
if the beneficiary would have attained NRA during the year even
if he in fact died before reaching NRA. These two minor changes
were made to prevent overpayments after death in cases where the
beneficiary had properly received payments based on the annual exempt
amount and then had this annual amount reduced after the fact, as
it were, because of his death.

1996 Legislation

Following the 1972 changes in the
law, increases in the exempt amounts were no longer determined solely
by legislative fiat but were indexed to increases in average wage
levels in the economy. This had the dual effect of providing regular
increases and of constraining the level of those increases. However,
the Contract with America Advancement Act, passed in 1996, made
another departure from the indexing by again making ad-hoc increases
in the exempt amounts for the NRA cohort. A schedule of increases
were programmed into the law which dramatically raised the exempt
levels between 1996 and 2002. Indeed, the value of the exempt amount
was more than doubled, by the estimates of the Congressional Budget
Office. (43)

Also, this second set of ad-hoc
increases for the NRA cohort had the effect of increasing the disparity
between this cohort and the age 62-64 cohort. Under the 1977 law,
the exempt amount for the 62-64 group was only 72% of that for the
NRA cohort in 1995. Under the estimates in the 1996 law, the percentage
would fall to 35% by 2002. This can be seen as a strong disincentive
for early retirement. However, since the amount for the NRA group
is fixed in law, and the amount for the 62-64 group fluctuates with
average wage levels, it is possible that the differential will vary
slightly from the estimates by 2002.

This doubling of the exempt level
also will significantly reduce the relative impact of the RET for
the NRA cohort. In 1995, the most recent year for which an analysis
is available, 960,000 beneficiaries were impacted by the RET as
a result of earnings for the NRA group. Of this total, 806,000 were
beneficiaries in the age cohort itself (the others were younger
auxiliaries), who had a total of $4.1 billion in benefits withheld
as a result of the RET. These figures have risen very little since
1989 when 758,000 beneficiaries in the age cohort had an identical
$4.1 billion in benefits withheld. (44) Because of the indexing
of the exempt amounts, the relative impact of the RET has not changed
much during this period. However, the doubling of the exempt level
as a result of the 1996 changes, will eventually have a dramatic
effect on the relative impact of the RET on the NRA cohort. In future
years, there should be a significant drop (relatively) in the number
of beneficiaries in the NRA cohort who are affected by the RET.

Also noteworthy in the context of
the 1996 changes is the degree to which these changes were met with
virtually universal support. Both Congressional leaders and the
Administration joined in advancing the provisions, disagreeing only
on the appropriate cost-offset in order to make the proposal deficit-neutral.

Significance
of the Legislative Changes

The 1935 Social Security Act adopted
the RET to honor the social insurance precept that the insured individual
must suffer a loss of income to qualify for a benefit. Placing a
dollar value on the RET in 1939 was an administrative clarification,
not a policy change. Placing a dollar amount on the concept of "retired"
was a technique for clarifying the test so that program administrators
would not become hopelessly entangled in disputes with beneficiaries
over whether or not they were in fact retired. Having accepted this
principle, that retirement can be measured against a dollar standard,
we can reasonably say that all subsequent increases in the exempt
amount are likewise consistent with the original intent of the RET.
They can be viewed, in the words of the 1947-1948 Advisory Council,
as honoring the idea that the social insurance principle is "to prevent the payment of benefits to persons
who continue working for wages at or near the level of those earned
during much of their working lives; such persons have not suffered
the loss of earnings against which the system insures."

Likewise, changing the offset from
an "all-or-none" character to a graduated offset, as first
done in the 1960 law, does not violate the original intent of the
RET, broadly construed. The graduated offset is simply another adjustment
mechanism to fine tune the test to the "wages at or near the level of those earned
during much of their working lives" construction.

The differential treatment between
the age 62-64 cohort and the NRA age cohort, introduced in the 1977
Amendments and expanded many times since, adds a new policy wrinkle
to the operation of the RET. From that point on, policymakers have
shown a clear and persistent tendency to treat the NRA cohort more
favorably, either because the negative impacts of the RET are thought
to be more onerous for this group, or to discourage early retirement
for the younger group, or perhaps both. This preference is not always
clearly articulated in these terms, especially the disincentive
for early retirement, but these are twin effects from the differential
treatment.

While the application of the exempt
amounts and the offsets do not fundamentally alter the basic character
of the RET, we certainly cannot say the same of the elimination
of the RET at ages 75, 72 and 70, as provided in the 1950, 1954
and 1977 laws. These were fundamental shifts in the conception of
the RET. For those at or above the exempt age, Social Security retirement
benefits have become annuities rather than a replacement for lost
earnings. Even so, it is pertinent to observe that these changes
were not motivated by industrial policy concerns about workforce
participation by older workers. Rather, these changes were introduced
to provide greater equity to certain groups of workers and to achieve
what would have to be described as a political accommodation with
the natural desire on the part of beneficiaries to collect payments
even though not retired.

The introduction of the Delayed
Retirement Credits in 1972 is another important factor in the dynamics
of the RET. In addition to creating incentives not to retire, the
DRCs have the very significant effect of reducing and eventually
eliminating the long-range program costs of eliminating the RET.
This could well prove to be a decisive factor in future legislative
activity regarding the RET.

Prospects
for Future Changes

Proposals to lessen the impact of
the RET, or even eliminate it entirely, have proven to be perennial
favorites on Capitol Hill. When the House Ways and Means Committee
was considering the 1960 changes to the law, no fewer than 175 bills
were submitted by members seeking to modify the RET. This is a pattern
that has persisted ever since. Although there is no direct tally
of support, it is likely that a majority in the Congress would favor
repeal of the RET if an acceptable way could be found to deal with
the resulting costs.

Changes in the RET have cost impacts.
Each time the exempt amounts are raised, or the offsets liberalized,
program costs increase. The cost of the 1996 changes alone were
estimated to be $7 billion over the 1996-2002 period. (44) But when
the value of DRCs reach their full actuarial equivalent in 2009
the RET could in principle be eliminated without any long-range
programmatic cost. Of course, there would still be the difficulty
of absorbing the costs in the short-term. With the advent of large
projected budget surpluses, it becomes easier to absorb the short-term
cost by appeal to this future funding. This combination of political
intent and favorable actuarial considerations, could make the prospects
for elimination of the RET greater than at any time since the RET
provision was created.

Conclusions

All peoples throughout human history
have had to come to terms with the problem of economic security.
That is, how to provide for individuals in their old-age, in event
of disability or unemployment, or upon premature death of a family-breadwinner.
With the coming of the Industrial Revolution, industrialized nations,
like America, changed in fundamental ways. We became urban wage-earners,
living in nuclear families, and life-spans increased dramatically
so that increasing numbers of people lived to advanced ages. Economic
security became irretrievably tied to some form of cash income.

Old-age, in particular, had long
been a vexing problem in the developed world. There comes a time
when most people grow too old for continued productive work, especially
in a wage-based industrial economy. Generations of older workers
found themselves unable to generate sufficient income to stop working.
According to the CES, at the time of the creation of the Social
Security Act, the majority of the elderly in America were living
in some form of dependency. Retirement for the wide spectrum of
average working Americans was virtually unheard of prior to the
passage of the Social Security Act.

So there was a large unsolved problem
of old-age dependency in America prior to Social Security. There
was a natural human need to cease working at some point in later
life. But in the industrial world, there was no practical way to
meet this need. It was this dilemma, among others, that social insurance
evolved to address. It was social insurance which first empowered
significant numbers of typical working class Americans to retire
at the end of a lifetime of work. Before the creation of the social
insurance programs of the early decades of this century, retirement
was a human imperative but an economic rarity. This awful dilemma
was finally broken in America by the passage of the Social Security
Act of 1935.

The creators of Social Security
saw the new social insurance program as providing the means for
older workers who wanted to retire but lacked the means to do so,
to have the necessary economic security to retire in dignity. By
and large, it was the philosophical premises of social insurance
which informed their intentions and their program designs, not any
industrial policy of making room for younger workers in a marketplace
where they were crowded-out by older workers. The primary rationale
for including a retirement test in the Social Security program was
adherence to social insurance principles. The belief that the RET
would have industrial policy impacts was not prevalent at the program's
creation. Following enactment of the law, this idea became part
of the folk-history of the Act.

It is historically incorrect to
say that the Social Security RET was made part of the Social Security
Act in 1935 in order to discourage continued workforce participation
by older workers. The RET is part of the Social Security Act for
the basic reason that Social Security was designed as an insurance
scheme, which seeks to compensate covered individuals who suffer
a loss of income due to retirement.

Of course the pure form of this
principle was abandoned long ago. For many decades, public policy
has decided that a compromise was appropriate between the principles
of the social insurance program and the wishes of insured workers
to have some level of continued earnings in their retirement.

It may well be that we have come
to the point where elimination of the RET is the preferred public
policy. We should however be clear that elimination of the RET is
not a reversal of some out-dated industrial policy. It would be
the abandonment of one of the principles of social insurance upon
which the Social Security program was founded. The loss of this
fundamental social insurance principle would no doubt be lamented
by some and applauded by others.

Acknowledgments

The author wishes to thank Professor
Edward Berkowitz of the George Washington University History Department
and Barbara Lingg and the editorial board of the Social Security
Bulletin for their constructive comments on earlier drafts of this
paper. However, any remaining errors are the sole responsibility
of the author.

4. The principal academic proponent
of this thesis is William Graebner who makes much of some very scant
evidence in support of this idea. Cf. Graebner 1980 and 1982.

5. The available analytical studies
(cf. Leonesio 1990 and Michael Packard 1990) have often suggested
a minimal effect from eliminating the RET. This may be due to the
fact that increases in the exempt amounts over the years, as well
as the liberalization of the offset amounts, and the lowering of
the age caps, have all reduced the scope of the test. Even so, a
substantial amount of benefits are withheld each year under the
test, as well as some number of workers who forgo retirement because
of the test (cf. Bondar 1993 and Kestenbaum, et. al. 1999).

10. Very few of the European systems
contained an explicit requirement of retirement after the manner
of the RET. However, these early systems generally conceived of
the problem of old-age security both in traditional pension terms
and in terms of what was called "invalidity" insurance,
i.e., disability. Many of them were predicated on the assumption
that the old-age problem was one of disability and compensated older
workers using disability benefits, which had cessation or reduction
of work as an eligibility requirement. Consequently, many of these
systems could be accurately described as having a retirement requirement
for old-age benefits, even though there might not have been an explicit
provision along these lines.

11. Latimer, Brown and Armstrong
were the experts chosen by the Committee on Economic Security in
1934 to advise it on the old-age insurance aspects of the President's
economic security package. Rubinow was terminally ill at the time
and Epstein was thought to be a difficult personality to deal with
so both were bypassed by the Committee.

12. Quoted in Douglas, op. cit.,
page 14. President Roosevelt owned a copy of Rubinow's 1934 book
"The Quest for Security." When he learned Rubinow was terminally ill,
he autographed his copy of Rubinow's book and sent it to him with
this inscription on the flyleaf: "For
the Author--Dr. I. M. Rubinow. This reversal of the usual process
is because of the interest I have had in reading your book."(Signed) Franklin D. Roosevelt.

13. Rubinow, op. cit., pgs. 3-9,
480-481, 302, 304.

14. Quoted in Perkins, op. cit.,
pg. 294.

15. Graebner takes the relationship
between the Townsend Plan and Social Security and turns it on its
head. (Cf. his 1982 essay, op. cit.) Graebner concludes that since
the Townsend Plan intended labor market effects, and since Social
Security intended to compete with the Townsend Plan, it follows
that the Social Security program intended to have even stronger
labor market effects than Townsend. This simply doesn't follow.
FDR and the other creators of Social Security intended to compete
with Townsend by offering a real plan in place of what they considered
to be Townsend's fantastic scheme. For its part, the Townsend Plan
was popular not so much because it offered to get older workers
out of the labor force, but because it promised every American age
60 and older a monthly pension twice as high as the average worker's
wage in 1935!

16. The industrial pension movement
of the early 20th century had very limited impact on the problem
of old-age security. By 1932, only 15 percent of the nation's potentially
eligible workers were covered by any kind of company-provided retirement
pension plan.

17. The other members of the CES
were: Secretary of the Treasury Henry Morgenthau Jr.; Attorney General
Homer S. Cummings; Secretary of Agriculture Henry A. Wallace; and
Harry L. Hopkins, the Federal Emergency Relief Administrator and
President Roosevelt's closest adviser.

18. Annual Message to the Legislature,
1931. In Public Papers
of Franklin Roosevelt,
Vol. 1, op. cit., pg.
103. Notice here that FDR has already begun drawing a sharp contrast
between welfare-based pensions and a system operating "on the
theory of insurance."

19. The
Public Papers and Addresses of Franklin Roosevelt, Vol. 3, op.
cit., pgs. 291-292. In this first formal statement on the issue,
the President is clearly defining the Social Security program as
a form of insurance.

22. Report
To The President of the Committee on Economic Security,
op. cit., pg. 25. Notice that in this quotation the CES uses the
term "annuities" to describe the old-age insurance plan.
This was the term used in the Administration's original bill. During
Congressional consideration this expression was dropped.

23. Social
Security in America, pgs. 198, 203.

24. Another key feature of the Social
Security program probably had the effect of encouraging
workforce participation by older workers. Under private pensions,
employers had a strong disincentive to hire or retain older workers
since private-sector pension plans contained age-differentials requiring
higher premiums for older workers. This often put the employer in
the dilemma of not hiring or retaining older workers or not having
a company pension plan. The Social Security program, with its level-premium
structure in which all workers were taxed at the same rate, thus
gave employers a newly found incentive to retain older workers in
their workforce.

25. Latimer, 1935, op. cit., pgs.
246-247.

26. Armstrong, 1934, op. cit., pg.
9.

27. Armstrong
Oral History Interview, op. cit., pgs. 253-263.

28. J. Douglas Brown, op. cit.,
pg. 125.

29. Myers, 1996 oral history interview,
op. cit.

30. Provisions of H.R. 4120 as introduced
in the House on January 17, 1935.

31. Social Security Act of 1935,
Sect. 202 (d).

32. Witte, op. cit., pgs. 159-160.

33. This is a distinction which
Graebner does not make, with the consequence that he finds support
for the industrial policy thesis in places where the present author
does not.

34. Many people currently advocate
changing the Social Security retirement program from a defined benefit
to a defined contribution plan, or privatizing the program in whole
or in part. However, virtually no one is advocating the elimination
of retirement programs from American life to encourage older persons
to continue working.

35. Cf. Hearings
Before the Committee on Finance of the United States Senate
op. cit., pg. 283-284. Brown makes use of the expression "uniform
compulsory retirement method" when discussing the effects of
the retirement program on unemployment levels. However, this phrase
refers not to the RET but to the general character of the social
insurance program as being of the contributory/compulsory type,
as the rest of the passage indicates.

36. Remarks by Senator Wagner during
Senate floor debate, June 14, 1935, Congressional Record, SENATE,
pg. 9286. Graebner (cf. 1980, pg. 184-185) finds at least two other
Congressmen who by his reckoning support the industrial policy thesis.
Charles Truax (D-OH), wanted the Administration's bill to use age
60 as the retirement age, like the Townsend Plan. A careful reading
of his remarks reveal that his criticism of age 65 may well have
been in the context of the old-age pension provision, not Title
II. William Sirovich (D-NY) spoke extensively, with great rhetorical
flourish, on the House floor about the virtues of the bill, and
recounted the entire history of civilization back to biblical days
in framing his support for the Administration's bill. Graebner finds
support for the industrial policy thesis embedded somewhere in Sirovich's
soaring rhetoric. The present author can find no such indications.

Armstrong, Barbara Nachtrieb, "Social
Insurance: Its Place in a Program of Economic Security and an Outline
of the Main Coverage, Benefit, and Administrative Provisions of
an Ideal Social Insurance System," unpublished CES study, August
1934. SSA History Archives.

Graebner, William, A
History of Retirement, Yale University Press, 1980.

Graebner, William, "From Pensions
to Social Security: Social Insurance and the Rise of Dependency,"
in Schacht, John, ed., The
Quest for Security, The Center for the Study of the Recent
History of the United States. 1982.

Hearings Before the Ways and
Means Committee of the House of Representatives on H.R. 4120. Government Printing Office.
1935.

Hearings Before the Committee
on Finance of the United States Senate on S. 1130. Government Printing Office.
1935.

Leonesio, Michael V., "The
Effects of the Social Security Earnings Test on the Labor-Market
Activity of Older Americans: A Review of the Evidence," Social
Security Bulletin, Vol.
53, Number 5, May 1990. Pgs. 2-21.

Myers, Robert J., "Basis and
Background of the Retirement Test," Social Security Bulletin,
Vol. 17, Number 3, March 1954. Pgs. 14-17.

Myers, Robert J., Social
Security, 4th
Edition, University of Pennsylvania Press. 1993.

Seager, Henry Rogers, Social
Insurance: A Program of Social Reform,
The MacMillan Company, 1910.

Social Security Board, Social
Security In America,
Government Printing Office. Washington, D.C. 1937.

Social Security Retirement Test,
Hearing Before the Subcommittee on Social Security of the Committee
on Ways and Means of the House of Representative.
Serial 102-28. May 23, 1991. Government Printing Office. 1991.

Witte, Edwin E., The
Development of the Social Security Act: A Memorandum on the History
of the Committee on Economic Security and Drafting and Legislative
History of the Social Security Act,
University of Wisconsin Press. 1963.

Important Information:

Other Government Websites:

Follow:

External Link Disclaimer

You are exiting the Social Security Administration's website.

Select OK to proceed.

Disclaimer

The Social Security Administration (SSA) website contains links to websites not affiliated with the United States government. These may include State and Local governmental agencies, international agencies, and private entities.

SSA cannot attest to the accuracy of information provided by such websites. If we provide a link to such a website, this does not constitute an endorsement by SSA or any of its employees of the information or products presented on the non-SSA website.

Also, such websites are not within our control and may not follow the same privacy, security or accessibility policies. Once you visit such a website, you are subject to the policies of that site.